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strategy+business

ISSUE 81 WINTER 2015

The Frugal Way to Grow


Pioneering companies in mature economies are
learning from emerging market companies a new
way to expand their businesses.

BY NAVI RADJOU AND JAIDEEP PRABHU

REPRINT 00368
INNOVATION
essay innovation

a 2 percent share in China. It was


then put through a workshop, which
uncovered that the Chinese health-
care market craved a much simpler,
less expensive piece of equipment. In
response, Siemens created a micro-
scope with automatic image process-
ing that could identify solids in the
sample. Its technology makes the
frugal machine more accurate than
chemical analysis done manually.
These frugal medical devices
have become popular in China, but
1 they are also selling surprisingly
well in Western markets. It turns
out that people in those markets,

The Frugal Way too, value simple devices that do


sophisticated things. Delivering fru-

to Grow
gal products in mature markets has
become a growth industry for Sie-
mens, as well as for other companies
in a variety of industries, including
Pioneering companies in mature economies automobiles, consumer products,
are learning from emerging market companies education, home furnishings, and
a new way to expand their businesses. even luxury goods.
Frugal innovation is associ-
by Navi Radjou and Jaideep Prabhu the Chinese users were much more ated with resource-constrained and

I
interested in a few basics, such as di- low-income emerging economies
n China, the Siemens R&D agnosing sports-related injuries and such as those of Africa, India, and
team has designed a high-end other common ailments. As these China, but we have recently seen
computed tomography (CT operators talked about their needs, the rise of frugal innovation efforts
scanning) device thats simple making models of what would work in developed nations including the
enough for health professionals who for them, the possibilities became U.S. and in Europe. These are not
are not doctors to use. To develop clear. The result was a Siemens scan- primarily cost-cutting measures, a
this, the company pioneered a type ner built for speed and simplicity. It response to financial constraint or
of innovation it called industrial consumes less energy but processes a tepid economy. Rather, across the
design thinking: The innovators images faster than a conventional developed world, companies are be-
convened workshops with users of scanner. It cuts the cost of treatment ginning to use frugal innovation as a
its devices and used craft supplies by 30 percent and reduces radiation growth strategy. They are introduc-
such as colored paper to build mod- by as much as 60 percent. And it is ing a larger lineup of new products
els in order to get a clearer idea of remarkably easy to use. and services, often with greater eco-
what people wanted. Another medical device that nomic and social value, at a much
Illustration by Lars Leetaru

For example, conventional CT benefitted from Siemens industrial lower cost and using fewer natural
scan devices in Western hospitals are design thinking workshops is a and financial resources. Their goal is
used for a wide variety of purposes, urinalysis machine originally de- not to create cheap offerings. They
including the detection of rare dis- veloped through conventional pro- want to create more effective offer-
eases. The settings and controls are cesses. When it was launched, the ings that draw people in with their
so complicated that operators must device quickly gained an 80 percent simplicity, while also cutting down
be trained at length to use them. But market share worldwide, but only on the use of various resources.
essay innovation
It turns out that the four key and make better use of materials, in- Building a Frugal Capability
attributes of frugal innovation cluding those in recycling bins. The growth opportunities in frugal
affordability, simplicity, quality, Technology and values combine innovation are clear; however, its
and sustainability are exactly the to make many of these innovations disruptive nature means that com-
qualities that customers in mature feasible. Many of the early adopters panies need to be strategic about
markets want most. This makes are found in grassroots communities how they adopt and implement it
frugal innovation a viable growth of prosumers, tech-empowered within their organizations. We sug-
strategy for companies expanding in consumers who use maker tools gest three entry points for compa-
those markets, not just in emerging such as 3D printers and peer-to-peer nies seeking to embark on a frugal
economies. sharing platforms including Airbnb innovation journey. The higher the
and BlaBlaCar to create their own level, the greater the risk and com-
The Link to Responsibility products or share their apartments plexity, but also the more enduring
Low prices and value, of course, and cars with other people. Other benefits conferred on companies
have always been important driv- early adopters are companies in ser- adopting it. 2
ers of growth, but they are generally vice sectors such as retail, healthcare, Level 1: Frugal products and
insufficient in and of themselves: education, banking, and insurance. services. This is a good starting
Something else needs to attract new For example, Leroy Merlin, one of point and creates a tactical competi-
customers and make it worth their Europes top home improvement tive advantage for companies facing
while to switch or experiment. In- retailers, teamed up with the do- stiff price competition from low-
creasingly, that second factor for it-yourself platform provider Tech- cost rivals. Think of fast-moving
consumers in relatively mature mar- Shop to upgrade some of its retail consumer goods companies trying
kets is environmental and social stores into maker spaces equipped to win back thrifty consumers who
responsibility, embedded into the with industrial tools and 3D print- have been switching to private-label
products and the processes by which ers that cater to digitally savvy products; brick-and-mortar hotel
they are made. These consumers prosumers. Thus, if your washing chains having to fend off Airbnb;
especially those in gen Y are machine breaks down, rather than or multinationals desperate to crack
emerging markets such as India and
China where frugal local companies
The attributes of frugal innovation reign supreme. Level 1 is also suited
to companies with a high environ-
affordability, simplicity, quality, mental impact, such as those in the
and sustainability are what automotive, chemicals, and electric
power industries. These businesses
customers in mature markets want. may be under pressure from regula-
tors and eco-conscious consumers
to redesign existing products and
increasingly both value-conscious ditching it and buying a new one, services, or to create new ones that
and values-conscious. For instance, you can bring the defective compo- are environmentally friendly. Frugal
according to one Nielsen study from nent to a Leroy Merlin store in your innovation can help.
2014, more than 40 percent of U.S. city, 3D-print a replacement part, Companies with a conservative
and European consumers today and take it home to fit into your ma- culture, where innovators are treat-
say they are willing to pay extra for chine. This innovation allows Leroy ed with skepticism, should gener-
products and services from compa- Merlin to expand its service dra- ally start at level 1. This stage often
nies that are socially and environ- matically without adding inventory, involves prototyping one-off pilot
mentally responsible. Moreover, creating a new high-growth business projects to test specific ideas. With a
reducing environmental impact is that didnt exist before and building well-designed prototype, and a great
inherently frugal and innovative: It loyalty with customers who are now deal of rapid innovation (often abet-
means developing designs and prac- aware that this retailer is innovating ted by digital fabrication), compa-
tices that cut waste, use less energy, on their behalf. nies can quickly develop and launch
essay innovation

a new frugal product or service, win vehicle worldwide. It could easily be must secure the buy-in and commit-
over the skeptics, and thereby build adapted to China, Russia, Africa, ment of all these functions and
momentum to launch more frugal Brazil, Eastern Europe, and South- value chain partners and embed
solutions down the road. east Asia. And although the com- frugality in all their activities. This
French carmaker Renault has pany has no explicit plans to bring may involve setting up a frugal in-
followed this strategy with its low- the car to more mature economies novation lab to regularly test new
cost Dacia auto line. Since launch- in Europe, it refers to the Kwid as practices and processes, dedicating a
ing the Logan a US$6,000 sedan a global platform for a global car. section of R&D to frugal efforts, or
in 2004, Renault has gradually Companies that succeed at level extensively partnering with external
expanded its product line of entry- 1 achieve only a tactical advantage innovators to accelerate and scale up
level vehicles to include an afford- because their frugal products and internal initiatives.
able van, pickup, and SUV all services can potentially be copied Unilever began to do all these
sold under the Dacia brand. Renault and exceeded in value and perfor- things in 2010, using its dedication
3 has set up a sizable sales and market- mance by rivals. To stay ahead of to environmental quality as a start-
ing group devoted to Dacia. Shun- competition and gain a sustainable ing point. CEO Paul Polman made
ning the low-cost label, this team advantage, companies need to move a public commitment to double the
shrewdly promotes Renaults entry- to level 2. companys revenues to 80 billion
(US$90.1 billion) by 2020 while
halving its environmental footprint.
A company can achieve competitive Since then, every functional and re-
gional unit of Unilever has been in-
advantage only by embedding volved in actively implementing the
frugality into the corporate culture. frugal business model. The R&D
function, for instance, is developing
resource-efficient products such as
level products as stylish, comfort- Level 2: Frugal business mod- soaps that kill germs more quickly
able, dependable, and outrageously els. Companies that sell commod- using less water. Supply chain teams
affordable. ity products in mature or saturated are reducing waste and boosting en-
Renault will be rolling out markets, and firms whose supply ergy efficiency in the firms global
another frugal car in India in late chains depend on increasingly costly value chain, which comprises 260
2015. Its called Kwid, and it has or scarce natural resources (such factories and 460 warehouses across
been developed from scratch using as water, wood, and oil), face huge 90 countries. And Unilevers pur-
exclusively local design, R&D, and pressures to do more with less. To chasing and sales groups are engag-
manufacturing talent. Boasting a stay competitive, these companies ing with thousands of suppliers and
sporty look, the Kwid incorporates need to advance from seeking tacti- distributors worldwide to source and
many innovative components, such cal advantage to enabling strategic distribute frugal products to 4 bil-
as a robust chassis and a fuel-effi- change. They must reinvent their lion consumers by 2020 in a socially
cient engine, to meet the demand- operations and practices systemati- inclusive and ecologically respon-
ing transportation needs of develop- cally, using both cost savings and a sible way.
ing nations. It is also exceptionally reduced energy and environmental At level 2, a company that has
roomy: CNN-IBN described it as footprint to distinguish themselves successfully implemented a frugal
a compact car apingan SUV. as companies that avoid waste. This business model can better defend
Priced below $5,000, Kwid will be involves going beyond lean manu- its competitive position. It is hard
sold first in India to aspiring middle- facturing and process reengineering, for any rival company to compre-
strategy+business issue 81

class consumers seeking a car that to a full redesign of the companys hend let alone reverse-engineer
combines affordability, elegance, value chain, encompassing sourc- and imitate the ingrained sys-
and reliability. Its a prototype in ing, R&D, production, distribution, temic changes and habits that now
the sense that Renault is testing the and product and customer service. suffuse the companys organization
larger opportunities for this type of To make this work, leaders and value chain.
essay innovation
Indeed, the biggest obstacle to 2014) about 13,500 tons of discard- panies across industries and regions
a successful implementation of level ed flooring and other waste from its do not uniformly practice its tenets.
2 is typically the company itself. If a own products as well as products of In particular, we find that firms in
drastic change occurs in the exter- other manufacturers. developed nations lag well behind
nal environment or internal condi- Michel Giannuzzi, CEO of their peers in emerging markets in
tions (such as the CEOs departure), Tarkett, is not the only leader striv- the frugal innovation journey. We
the organizations atavistic instincts ing to inculcate a frugal mind-set at estimate that only 5 percent of com-
may gain the upper hand and the all levels of an enterprise. At health panies in developed economies (the
company may revert to its un-frugal insurer Aetna, CEO Mark Berto- U.S., Europe, and Japan) have ad-
habits. A company can achieve an lini is promoting value-based care, a vanced to level 3. An additional 15
enduring competitive advantage in frugal strategy for delivering better percent operate at level 2 or 1, hav-
the resource-constrained 21st cen- care at lower cost for more U.S. resi- ing incorporated frugality into only
tury only by embedding frugality dents which will require major some parts of their organization.
into the corporate culture. To do so, shifts in the 162-year-old companys The remaining 80 percent have yet 4
senior leaders must move to level 3. corporate culture. (See Mark Ber- to articulate a coherent and wide-
Level 3: Frugal mental models. tolinis Preventive Disruption, by ranging frugal innovation strategy.
Like Unilever, the Tarkett Group Jon Katzenbach, Gretchen Ander- These firms in particular should
has reinvented itself to meet the de- son, and Art Kleiner, s+b, Apr. 13, consider kick-starting their frugal
mands of its evolving environmen- 2015; and Aetnas Frugal Health- innovation engines without delay,
tal strategy. But this global flooring care Strategy, by Navi Radjou and for three reasons. First, as govern-
and sports surface solutions pro- Jaideep Prabhu, s+b, Sept. 15, 2015.) ment and household budgets con-
vider, headquartered in Paris, has Similarly, John Fallon, CEO of lead- tinue to face downward pressure in
adopted circular economy prin- ing education company Pearson, has the developed world, frugal prod-
ciples. In this type of industrial de- proposed a shift in the mental mod- ucts and services are quickly mov-
sign, waste is eliminated. Biological el of all his employees from selling ing from niche markets into the
elements are put back into the eco- books to selling digital education mainstream. Second, regulators in
system in a sustainable way, while services. These software-based of- the U.S., Europe, and Japan are in-
all other materials are designed to ferings are more affordable than tra- creasingly driving companies to de-
be reused, recycled into new prod- ditional textbooks and can be more velop products and services that are
ucts, or used as input into some effective in promoting learning, be- more affordable, accessible, and en-
other industrial process. cause students can personalize the vironmentally friendly. And third, a
Operating this way takes a kind information they access according range of frugal and agile competitors
of openness to the outside world to their needs. are beginning to take big chunks of
that is rare among business lead- Making this kind of radical market share away from incumbents
ers. Tarkett is working with other change and striving to cultivate a in the West, across several sectors.
companies to develop eco-friendly frugal mind-set wont be easy for Such frugal rivals include emerging
products made using only rapidly conservative organizations that have market companies breaking into the
renewable raw materials such as pine operated for decades under the as- rest of the world, well-known digi-
resin, walnut shells, jute, and linseed sumption that bigger is better. It tal disrupters (Apple, Google, Ama-
oil, as well as recycled plastic. It is will require unlearning old thinking zon, Airbnb, and many others), and
also working with retailers such as patterns and habitually doing more large interlopers from mature sec-
Walmart, which collects recycled with less. tors (such as Walmart, which is ex-
carpet in many of its stores. By re- panding into financial services and
inventing its entire value chain to Deciding Where to Start healthcare).
make it sustainable, Tarkett intends It may seem as if many of the basic Its important to note that fru-
to eliminate industrial waste enter- tenets of frugal innovation are simply gal innovation isnt a panacea for all
ing the landfill by 2020; currently, those of good management. Indeed, businesses. Nor may it be a strategic
it maintains seven recycling centers we posit that frugal innovation is imperative for all companies. For
that have captured (as of the end of part of good management. Yet com- instance, companies selling premi-
essay innovation

um products such as luxury goods


and vendors of high-end technolo-
gies are not typically pressured by
their brand- and quality-conscious
clients to develop frugal products.
And yet, even these premium prod-
uct suppliers can adopt frugal busi-
ness practices internally to develop
new products faster and better and
to become more efficient and agile
in responding to customer needs.
Luxury conglomerates Kering and
LVMH, for example, are both insti-
5 tuting circular economy principles
in order to reduce their carbon foot-
print and boost resource efficiency
in their global supply chain.
Each of the three entry points
in our framework offers a way for
companies to get started on the fru-
gal innovation journey. To decide
which level is best for their com-
pany, leaders need to consider the
degree of urgency in their industry
along with their own leadership
style and the existing corporate cul-
ture. However, in the long run, we
believe that almost all companies
will eventually need to get to level
3 to gain a sustainable advantage. +
Reprint No. 00368

Navi Radjou
navi@naviradjou.com
is a Silicon Valleybased innovation and
leadership advisor. A TED speaker and
winner of the 2013 Thinkers50 Innovation
Award, he is the coauthor (with Jaideep
Prabhu and Simone Ahuja) of Jugaad
Innovation: Think Frugal, Be Flexible,
Generate Breakthrough Growth (Jossey-
Bass, 2012). His new book (with Jaideep
Prabhu) is Frugal Innovation: How to
Do More with Less (Profile Books, 2015).

Jaideep Prabhu
j.prabhu@jbs.cam.ac.uk
is the Jawaharlal Nehru Professor of In-
strategy+business issue 81

dian Business and Enterprise and director


of the Centre for India & Global Business
at Cambridge Judge Business School.
He is the coauthor (with Navi Radjou and
Simone Ahuja) of Jugaad Innovation and
(with Navi Radjou) of Frugal Innovation.
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